The pension annual allowance is the limit applied to total gross contributions that can be paid into a pension scheme each year for tax purposes. It applies across all schemes you belong to. If you exceed the pension annual allowance you won’t receive tax relief on contributions above the allowance, and you will have to pay an annual allowance tax charge on the excess.
What’s changing?
From tax year 2016/17, an individual with ‘total’ income of over £150,000 will have a reduced pension Annual Allowance, including salary, any employee or employer pension contributions, bonus, profits from self-employment, pension income (including uncrystallised pension lump sums), benefits in kind, income from property, savings, dividends and taxable lump sum death benefits (post 5 April 2016).
For every £2 of ‘income’ individuals have over £150,000 in a tax year, the standard pension Annual Allowance of £40,000 will be reduced by £1, until their allowance reaches £10,000.
Example:
Mr B has ‘total’ income in 2016/17 of £180,000.
His total income is £30,000 over the new pension annual allowance threshold. His annual allowance will therefore reduce by £15,000 (£30,000 / 2) so his new annual allowance for 2016/17 will be £25,000 (£40,000 – £15,000).
Individuals with total ‘income’ of £210,000 or more will see their pension annual allowance reduce to £10,000.
What can be done to prepare for the changes?
You will still be able to carry forward any unused tapered pension annual allowance for 3 years, as per the normal rules.
If you have unused pension annual allowance in 2015/16 you could also look at maximising your pension contributions in the current tax year. The annual allowance in 2015/16 is effectively £80,000, due to transitional measures put in place arising from changes to ‘Pension Input Periods’ announced in the Summer Budget.
Any pension contributions made before 9th July this year fell into the first £40,000 pension annual allowance ‘mini year’ due to transitional measures; thereafter an additional annual allowance of £40,000 was available for the remainder of the tax year.
You can also carry forward unused allowances from the previous three tax years, up to a maximum of £140,000 (£50,000 in 2012/13 and/or 2013/14 and/or £40,000 in 2014/15).
If you earn over £150,000 a year, and wish to discuss how the pension annual allowance changes will impact you and what you can do to mitigate the effect, speak to your adviser’s PA or call to arrange a consultation meeting on 01244 539595 with one of our advisers.
